FMG dividends 'definitely sustainable' as spending surges

Fortescue Metals' dividend policy is "definitely sustainable'' says chief executive Elizabeth Gaines as the iron ore miner enters a three year period in which it will spend $US3.37 billion ($5 billion) on new mines and is due to repay $US2.15 billion of debt.

Fortescue returned 78 per cent of its record $US3.18 billion profit to shareholders as dividends in fiscal 2019, with those distributions worth a staggering $1.24 billion to the company's founder, chairman and major shareholder Andrew Forrest.

FMG chief executive Elizabeth Gaines: ''There is no doubt that periods of protracted trade tensions are not condusive to global growth." Philip Gostelow

Iron ore prices have slumped by more than 30 per cent over the past seven weeks, but despite those falls and Fortescue's large spending commitments, Ms Gaines said the policy of paying between 50 per cent and 80 per cent of profits to shareholders would be retained.

''We think that dividend policy is definitely sustainable," she said.

''You would expect in periods of high iron ore prices that we would be toward the upper end of that range, and if iron ore prices are lower it would probably be toward the middle or toward the lower end of that range. It will flex and it is intentionally designed to do that.''

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The $1.14 per share of dividends in fiscal 2019 does not include $139 million of share buybacks in the year, and almost matched the $1.33 of total dividends paid by Fortescue in the previous eight years.

Shaw and Partners analyst Peter O'Connor said Fortescue's results were better than expected, but that did not prevent shares in the miner sliding by more than 5 per cent on Monday as investors feared a trade war on the back of new tariffs announced by China on US products over the weekend.

''There is no doubt that periods of protracted trade tensions are not condusive to global growth,'' said Ms Gaines.

None of Fortescue's $US3.95 billion of debt is due for repayment until 2022, but $US2.15 billion of it is scheduled to mature in that year.

The average interest rate on that debt is just above 5 per cent, and with super low interest rates now entrenched across the world, Ms Gaines said the company would likely look to refinance its 2022 debt obligations.

But she indicated any refinancing would likely be focused on the maturity schedule.

''It is less about the costs, it is more about looking at the maturity profile and looking at opportunities as and when they might arise," she said.

''But there are definitely opportunities for us to take another look at the current market".

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The Chinese steel sector was responsible for 93 per cent of Fortescue's revenue in fiscal 2019, meaning it is heavily exposed to any slow down caused by a trade war with the US.

Rival iron ore miner BHP predicted last week there would be no growth in Chinese steel output in the year ahead, but Ms Gaines said the extremely strong growth in Chinese steel output in early 2019 ensured annual production would almost certainly be higher, even if demand eased in the final four months of 2019.

Amid perceptions that fiscal 2020 may be tougher for Fortescue than fiscal 2019 given the recent slump in iron ore prices, Ms Gaines noted that even after the recent slump to below $US90 per tonne, iron ore prices were still close to 10 per cent higher than the average benchmark iron ore price of $US80 per tonne in fiscal 2019.

BHP claimed last week it had usurped rivals like Fortescue to become the world's lowest cost producer of iron ore.

Both companies do not include government royalties in their iron ore unit costs, but Ms Gaines said Fortescue did include royalties paid to non-government third parties in their unit costs.

The comment is a veiled reference to the iron ore royalty BHP pays to Iluka Resources each year, which was not included in BHP's unit costs.

''We don't exclude other third party royalties from our calculation," she said.

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''We have an industry leading cost position and we have been able to sustain that over the last three years.''

Fortescue expects unit costs to rise to between $US13.25 and $US13.75 per tonne in fiscal 2020, and Ms Gaines said that rise was partially due to wage pressures.

"We've had a couple of years now of wage increases which we didn't have for a number of years, so that is a driver, and we have got longer haul distances, so as we develop new mine areas we are getting longer haul distances which results in more utilisation of consumables," she said, in reference to things like diesel.